Topics will include:Will sanctions on Russia tighten, and what assets will be included?How will populism impact EM? Are trade wars likely?What are the likely outcomes of elections in Venezuela, Brazil and Mexico?What is the future direction of Turkish rates, and do local bonds offer value?Will EM issuance and inflow trends continue?How can investors protect their EM portfolios during market volatility?And much more

Sanctions on Russian assets and EM elections were among the issues reviewed at EMTA’s Fifth Annual Forum in Zurich, held on Tuesday, April 24, 2018. The event was sponsored by MarketAxess and drew 50 market participants. Exotix and Goldman Sachs provided additional support.

In opening the event, moderator Paul Domjan (Exotix) polled speakers for their view of sanctions on Russia. Vontobel Asset Management’s Sergey Goncharov opined that the actions taken thus far could be characterized as “unpredictable,” although in the days prior to the Forum, the US stance appeared to be easing. While acknowledging that his firm had reduced its weighting in Russian assets, and warning that the debt would be tagged with a political premium for “some time to come,” Goncharov believed that the number of opportunities had increased, “so it plays out in both good and bad ways.”

Fisch Asset Management’s Meno Stroemer agreed that, in the days preceding the Forum, there appeared to be a “walk-back, as the US Treasury may not have understood exactly the global interconnections in cases such as Rusal.”

As the panel turned to a discussion of political risk and EM elections, Olgay Buyukkayali (Goldman Sachs) noted his optimism on South Africa and even though some of the fundamental improvements have been priced in, Buyukkayali suggested that opportunities still existed in local rates.

On the other hand, Domjan noted that, in his view, the market was not sufficiently accounting for political risk in Mexico, adding he was “very concerned” about potential changes that could occur in the aftermath of an Andres Manuel Lopez Obrador (AMLO) victory. Goncharov acknowledged that volatility would persist in the run up to the vote, and the MXN might not reflect the odds of an AMLO victory, while underscoring that ultimately, “Mexico is still a BBB+ story.”

Turkey was, “some of us on the panel agree, an accident waiting to happen,” summarized Stroemer. Enzo Puntillo (GAM) pointed out that the country’s large external imbalance was financed by short-term debt, thus vulnerable to inflows drying up. “Financing could continue to work for a long time, or it could blow up very quickly,” he stated. Buyukkayali said investors could continue to remain cautious at least until they saw disinflation and rebalancing signs.

The interest in EM local currency assets was no longer simply a result of DM liquidity, according to speakers. Puntillo declared that the “reasonably positive economic cycle” across EMs would provide support, with Buyukkayali concurring on the positive effects of EM growth. Goncharov directed attention to the nascent market in local currency-denominated Eurobonds.

Several panelists underscored the need for expert active portfolio managers as RFPs for local currency-denominated portfolios remained strong. Stroemer stressed that, “the EM local currency market is meant for the professionals; if you have people who aren’t trained in these markets, it’s a recipe for disaster.” Puntillo agreed that, “EM generally has some unique challenges—there are more obstacles that aren’t the norm in DM.”

Finally, the panel included a discussion of frontier markets. “Governance can be an issue in some frontier countries…you need to be deep in the weeds; and returns can evaporate in a nano-second,” stated Stroemer, who continued that frontier country investment was, “the deep end of the swimming pool; it’s for adults only.” Still, speakers offered suggestions for frontier investing. Moderator Domjan expressed excitement about the potential for a new Zimbabwe. Puntillo had dabbled in Ghana, and suggested Venezuela might be attractive, but only for those “select, patient investors who could take on the extra risk.”